The holiday season is a time for celebrating with friends and family. It is also the time of year when retail sales are at their peak.

Until the past decade, the primary way to avoid the holiday crowds was to shop early or shop via catalogue. The advent of online shopping has enhanced significantly the options for most consumers. Anyone with access to the Internet and a credit card has countless “e-tail” possibilities.

eBay, Inc. reported revenue for the fiscal third quarter ending September 30 of $2.2 billion, excluding Skype, which was up 10% compared to the same period in 2009. Amazon.com reported net income of $231 million, or 51 cents a share, on revenue of $7.56 billion for the fiscal third quarter, up from $5.45 billion a year ago.

According to the U.S. Census Bureau of the Department of Commerce, the percentage of total retail sales through e-commerce in the U.S. has grown from 0.6% in the fourth quarter of 1999 to 4.1% in the second quarter of this year, totaling $32.9 billion. The total sales from June through August 2010 were up 4.7% from the same period a year ago. These figures are based on retail e-commerce sales, which do not include ticket sales, real estate transactions and travel services.

Certainly, e-commerce is one of the most dynamic sectors of the future economy. The industry has changed behaviors of both retailers and consumers all over the world. At the same time, the industry and related laws are still evolving, and not many consumers or retailers are familiar with regulations relating to online business transactions.

With the bar to entry so low, many would-be entrepreneurs can set up viable online businesses and conduct business worldwide with minimal capital outlay and seemingly limited oversight. Other established businesses enter this market with limited knowledge of the various rules and regulations that govern e-commerce . Consequently, both groups might inadvertently expose themselves to potential legal problems.

Below are some recent issues arising from online businesses that have triggered legal battles between online retailers and consumers.

Shipment Representation

All retailers need to manage inventory. However, online retailers also need to consider the way in which they communicate with their customers if they don’t have enough of a particular item in stock to meet an expected shipping date.

Section 5 of the Federal Trade Commission (FTC) Act prohibits unfair or deceptive acts or practices in or affecting commerce.1 The FTC requires retailers who sell merchandise through the mail or by telephone to comply with FTC’s Mail or Telephone Order Merchandise Trade Regulation Rule.2

Under this rule, retailers must have a reasonable basis for any express or implied shipment representation, or for believing they can ship within 30 days of receipt of an order. If no shipment time is promised, retailers need to ship an order within 30 days after receiving the order.

If a retailer is unable to ship within the promised time, it must provide consumers with a delay notice, through which the retailer must give consumers the choice of agreeing to the delay or cancelling the order and receiving a prompt refund. Finally, if a company does not promise a shipping time, and a consumer is applying for credit to pay for the purchase, the company has 50 days to ship after receiving the order.

While this FTC rule is very specific and leaves little room for interpretation, many foreign online companies who target U.S. consumers fail to specify the shipment date and are most likely not aware of this rule.

Privacy Policy

While consumers enjoy the convenience of receiving merchandise through the Internet, they are increasingly concerned about online data retention policies.

In Japan, where many of my clients are located, the allowed scope of disclosure of personal information is much narrower than that of the U.S. Under the Personal Information Protection Act (PIPA) of Japan that took effect in 2005, “personal information” is defined as “information about a living individual which can identify the specific individual by name, date of birth, or other description contained in such information.”

The act requires that any entity shall not transfer personal data or information to a third party without the prior consent of the person except in special circumstances. A “third party” includes an affiliated company. That means that U.S. retailers located in Japan that target consumers in Japan cannot share personal information they obtained from individuals in Japan with their affiliated companies located in other countries without prior consent of those individuals. Any person or entity that violates PIPA can face criminal penalties of up to six months in prison and civil penalties of up to 300,000 yen ($3,000).

In the U.S., the Children’s Online Privacy Protection Act (COPPA)3 contains one of the significant rules relating to online privacy. COPPA regulates online operators whose websites are directed to children under 13 and who collect personal information from children under 13.

3) give parents the opportunity to prevent further use of collected information; and

4) not require a child to disclose more information than is reasonably necessary to participate in an activity.4

Some exceptions are provided, but the statement in a website should clearly state that the use of the site is conditioned upon the acceptance of the privacy policy. COPPA also applies to foreign websites that are directed at U.S. children.

While online operators in Japan or businesses owned by Japanese do not often include or take into consideration the regulations in the U.S., online operators in the states who target consumers in Japan are often not aware of the local regulations such as PIPA.

Advertising

The rules relating to online advertising are similar to advertisement in any business field. To maintain the credibility of marketers and bloggers as an advertising medium via the Internet, the FTC has recently revised its guidelines concerning the use of endorsements and testimonials in advertising.5

According to the new guidelines,6 endorsements and testimonials must reflect the honest opinions, findings, beliefs or experiences of the endorsers, and the endorsements may not contain any representations that would be deceptive. Some public relations firms that were hired by online retailers have posted favorable online reviews for their clients without disclosing that they were being paid to do so, as if they were regular consumers. When there is a connection between the endorsers and the online retailers, the connection must be fully disclosed, including that the endorsers received cash or in-kind payment to review products or services.

The new guidelines apply to both online sellers and advertising agencies representing the sellers. The revised guidelines also impact blogs, social networking websites, and companies that feature user- or consumer-generated content in marketing campaigns to build product and brand awareness.

The FTC has recently investigated a number of online retailers who have given gifts to bloggers. In a recent case, a PR agency hired by video game developers settled FTC charges that it had engaged in the practice of deceptive advertising.

In this case, the agency posted public reviews about the client’s gaming application. These reviews were posted using account names that would give readers the impression they had been submitted by disinterested consumers.7 Some companies that were targeted for investigation have not been charged with violation of the FTC rules because those companies had a policy of telling bloggers that they must disclose any gifts or a percentage of the sales they received.

Any violation of the FTC rules is subject to civil penalties of up to $16,000 per violation.

While the Internet’s global reach has made possible a cost-effective means for selling products worldwide, the rapid growth of this industry has created a new set of legal complications for both online retailers and attorneys focused on this area. These complications are compounded when an online retailer conducts business in foreign markets.

It is easy to overlook the many rules and regulations that govern this type of business in other countries. Many companies may inadvertently find themselves out of compliance with local rules and regulations. It is therefore important for these companies and the attorneys who represent them to carefully research the laws and regulations, including tax and customs requirements, of the countries in which they plan to do business.

Once a clear understanding of all laws and regulations has been established, it is also important to incorporate this information into the “Terms of Use,” “Privacy Policy” and “Intellectual Property Policy” sections of a website.

Online business can be lucrative, but it is not without risk. Careful planning and research up front can mitigate risk. It can also create a more positive business experience for both retailers and consumers.

Naoko Inoue Shatz has practiced mainly contract law and corporate law. Her client base consists primarily of companies that have business in Japan and Japanese companies located in the U.S. She is licensed in Washington and New York.

1 15 U.S.C. § 45(a).

2 16 C.F.R. Part 435.

3 15 U.S.C. §§ 6501–6508.

4 16 C.F.R. Part 312.

5 FTC File No. P034520.

6 16 C.F.R. Part 255.

7 FTC File No. 0923199.

*This article was published by King County Bar Association in December, 2010.

井上奈緒子

Naoko Inoue Shatz is a U.S. lawyer who has extensive business experience in Japan, and she has a wide range of practice experience involving cross border matters and legal disputes between U.S. and Japan. Her dedication and responsiveness in addition to her experience has often helped corporate clients quickly uncover challenging issues and develop a sound business relationship. 井上奈緒子は日本でビジネスの経験を持つ米国の日本人弁護士で、アメリカと日本の2国間にかかわる一般法務から法的紛争にわたって幅広い経験を持ちます。さらに専心さと対応力に関しても多くのクライアントから評価を得ており、国際商業取引業務においてクライアントとは確実な関係を築きあげてきています。Read More

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